IRS Publication 541 — Partnerships

• An organization wholly owned by a state, local, or foreign government.

• An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships).

• Certain foreign organizations identified in Regulations section 301.7701-2(b)(8).

• A tax-exempt organization.

• A real estate investment trust (REIT).

• An organization classified as a trust under Regulations section 301.7701-4 or otherwise subject to special treatment under the Internal Revenue Code.

• Any other organization that elects to be classified as a corporation by filing Form 8832.

For more information, see the instructions for Form 8832. Limited liability company (LLC). An LLC is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. However, if the LLC is an employer, an LLC member may be liable for employer-related penalties. See Pub. 15, (Circular E), Employer’s Tax Guide, and Pub. 3402, Taxation of Limited Liability Companies. An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301.7701-3. See Form 8832 and Regulations section 301.7701-3 for more details.

Tip: A domestic LLC with at least two members that doesn’t file Form 8832 is classified as a partnership for federal income tax purposes.

Organizations formed before 1997. An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and doesn’t elect to be classified as a corporation by filing Form 8832. Community property. Spouses who own a qualified entity (defined below) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040), Profit or Loss From Business, listing one spouse as the sole proprietor. A change in reporting position will be treated for federal tax purposes as a conversion of the entity. A qualified entity is a business entity that meets all the following requirements.

• The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States.

• No person other than one or both spouses would be considered an owner for federal tax purposes.

• The business entity is not treated as a corporation. For more information about community property, see Pub. 555, Community Property. Pub. 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Partnership Interests Created by Gift Gift of capital interest. If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income -producing factor, the donee’s distributive share of partnership income is subject to both of the following restrictions.

• It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership.

• The donee’s distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor’s distributive share attributable to the donor’s capital. Purchase considered gift. For purposes of determining a partner’s distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. The FMV of the purchased interest is considered donated capital. For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons).

Partnership Interests Held in Connection With Performance of Services Section 1061 recharacterizes certain net long -term capital gains of a partner that holds one or more applicable partnership interests as short -term capital gains. The provision generally requires that a capital asset be held for more than 3 years for capital gain and loss allocated with respect to any applicable partnership interest (API) to be treated as long -term capital gain or loss. Proposed Regulations ( REG-107213-18) were published in the Federal Register on August 14, 2020. Final regulations (Treasury Decision 9945) were published in the Federal Register on January 19, 2021. Treasury Decision 9945, 2021-5 I.R.B. 627, is available at IRS.gov/irb/2021-5_IRB#TD-9945. Owner taxpayers and pass -through entities may rely on the proposed regulations for tax years beginning before January 19, 2021 (the date final regulations were published in the Federal Register), provided they follow the proposed regulations in their entirety and in a consistent manner. An owner taxpayer or pass -through entity may choose to apply the final regulations to a tax year beginning after December 31, 2017, provided that they consistently apply the final section 1061 regulations in their entirety to that year and all subsequent years. Owner taxpayers and pass -through entities must apply the final regulations to tax years beginning on or after January 19, 2021. See Section 1061 Reporting Instructions, later. Applicable partnership interest (API). An API is any interest in a partnership that, directly or indirectly, is Publication 541 (12-2025) 3